Understanding Truths that Rule Every Real Estate Market

Whether you're in a major metro market or a small town and regardless of the country, the economy, or even the day and age in which you're doing business, when you're in the field of real estate, three core rules apply to your business:

Real estate is governed by the law of supply and demand. This rule is absolute and without exception. The appreciation of a market, the expectations of buyers and sellers, and the velocity of market sales are all dictated by the supply of — and the demand for — real estate for sale.

As a recent example, agents saw rapid appreciation and a frenzied response by buyers in the U.S. real estate market in the years 2002-2005. This response was caused by the fact that demand for real estate was at an all-time high while the supply was limited. This supply and demand caused rapid appreciation, with home sellers receiving multiple offers within days or even hours. At one time during that period, homes in southern California were selling, on average, at 18 percent above the listed price — the result of a market condition where demand outstripped supply.

Real estate is governed by the law of cause and effect. Put differently, positive situations cause positive outcomes, and vice versa. For example, a vibrant economic growth leads to a vibrant real estate market and strong appreciation of homes, while loss of jobs and a languishing economy produce exactly the opposite effect.

As a specific example, as the baby boom generation matured, it fueled an explosion in second home purchases so strong that more than 21 percent of 2004 U.S. home sales were second home purchases, most acquired by aging baby boomers. This surge created desire for additional housing that affected the construction and home values in second home markets nationwide.

History repeats itself. In any marketplace, you have cycles. Periods of rapid real estate appreciation are followed by stagnant periods where values stabilize or even decrease. By acquiring marketplace knowledge, you can foresee trends both for your own benefit and for the benefit of your clients.

For example, in a number of key U.S. market areas, more than 40 percent of new home loans are being written as low money down, interest-only mortgages. These limited-equity position purchases are being made on the assumption — the gamble — that the recent rapid-appreciation cycle will continue and that housing prices will climb ever higher. When the growth trend stops, as it has many times before, home values will decline, mortgage balances will exceed resale prices, and a large group of home buyers will be forced to walk away from their homes as banks foreclose on a significant number of loans. This trend will further lower values and stagnant growth, as it has many times before.